speaks so the lesson is really persuasion necessary and it's imperative to sway the downfall but if you don't do the numbers you want succeed to persuade. these two men together symbiotically get. >> we are speaking with fergus border which, america's great debate. thank you. >> thank you. >> remember barack obama speech in 2004. this dazzling rhetorical masterpiece that instantly makes him a national figure and four years later without that speech he is not it all up full candidates candidate so lincoln gets a dazzling speech in new york at the cooper union, beautiful testament to the quality of lincoln's line, the research researcher does the logical argument. it's a fantastic speech well worthy of praise that when he ran for the senate, barack obama
gave his speech in 2004 he was running for the senate in illinois and the one. abraham lincoln ran for the senate in illinois and the loss. think about a family can in 1860, think about barack obama running for the presidency in 2008 if he had lost the illinois senate election. but there level of national security we are talking about here. it. >> now on booktv, as james hagerty of "the wall street journal" talks about the 1938 creation and 70 year history of the mortgage giant fannie mae. it's about an hour and 15.
>> thank you all very much for being here and good afternoon. welcome to our book forum, "the fateful history of fannie mae," faithful not only for fannie mae but everybody else too and there are copies of the book on sale in the reception area, which we hope you will buy and which james hagerty will be happy to autograph after the program. i'm a resident fellow here at aei and we are very pleased to have you here to consider what this is fateful history and its role in american politicized housing finance. after many years of dealing with and thinking about fannie mae, i thought i knew a lot about the subject but i learned a lot more about it from reading bob's book, especially about the very long-term evolution of politicized mortgage finance in
this country and also about the vivid personalities involved over the last 40 years, all the way to the end of the story, at least it's the end so far. the book is full of information but in addition, if you read my invitation to this event you know that i think it represents an underlying tragic drama. in fact, a shakespearean tragedy in five acts. rise, power, hubris, fall, and utter humiliation. [laughter] on power, many people in washington not so long ago and in the mortgage business everywhere in the country were truly afraid of fannie mae and the retribution it meted out to people who dare to cross it.
hubris, fanning a often claiming it was the center of quote the best housing finance system in the world of quote so ironically in retrospect of course. this sentiment being echoed by former senator and banking committee chairman dodd explaining that fannie was quote one of the great success stories of all times unquote and so it was until the fall it's humiliation. all five acts are very well kwon are called by bob's book. but which shakespearean tragedy is this in the background behind the history of fannie mae? thinking of the fear of fannie, perhaps it's richard iii with fannie as the ruthless richard brought down finally upon the
field of bosworth by henry paulsen playing henry vii. , a thinking of ben fannie's ceo as presented in the book, pathetically presenting financial plans to a treasury department which had already decided upon and was indeed scheduling his fate. is it the great pathos full abdication scene from richard the second, handing over the crown to henri iv, played by james lockhart? may be. but i think the best shakespearean analogue is julius caesar, with the dictator of mortgage finance cut down in the capitol, henry paulsen type playing brutus but i'm thinking especially of the great scene where marc anthony stands over
and addresses the murdered body of caesar. this time we have marc anthony played by bob hagerty. [laughter] standing over and addressing the following fannie, all mighty fannie dost thou lie so low. well, that is enough indulging myself. we are about to hear from the author of this excellent book and after bob's presentation comments from 10 minutes each from our discussants whom i will introduce at that point and i will follow that by discussion including your questions. at 6:00 we will adjourn for a reception and bob will be available for a book signing and a formal do so -- in formal discussion at that point. as you know bob hagerty writes for "the wall street journal" which is now based in pittsburgh and has worked as a reporter, editor and bureau chief for "the
wall street journal" and the international "herald tribune" in hong kong, london, brussels, paris, atlanta and new york. he served as managing editor of the asian "wall street journal" and london bureau chief for the journal. he was a member of the team that won the distinguished business reporting award for articles about the sub-prime mortgage crisis and was also one of the reporters awarded the 2008 excellence in urban journalism award. he covered fannie and freddie for "the wall street journal" over the eventful years of 2004 to 2010, and now he has written a very insightful and instructive book, "the fateful history of fannie mae" which he will now discuss. we are delighted to have you here. [applause] >> thank you so much alex and thank you all for your interest in this topic.
i think it's really appropriate that i present my book here, because they aei was so far in warning of the dangers of fannie and freddie. not the congress was really listening. [laughter] and it's a pleasure to be here and see so many people who kindly helped me over the years in my research, alex, tom, ed, tom staton, burt healy and others. thank you all. i recently looked up the electronic version of my book on itunes and itunes informed me that people who bought my book also bought winnie the pooh. [laughter] well, when he first appeared in 1926. fannie mae came along about a dozen years later and both have proven surprisingly durable. one turned into a disney franchise and the other became a
national disaster. despite all of their troubles, fannie and freddie still are responsible for most new home mortgages in the united states, so we have nationalized a huge part of our mortgage industry. how did we get to this point? it was not on purpose. it was really more of an accident and it was a bipartisan accident. let's go back to the 19 30s. about a quarter of the workforce was unemployed. around half of all mortgage debt was in default. housing starts were down about 90%. so when roosevelt became president in 1933 the top priority was to get people back to work. it sounds kind of familiar. building houses would be a great way to do that, but to build houses you need bank loans and banks were not really in the mood to gamble on real estate. so the government would try to
make the banks feel more secure. the housing act of 1934 created the federal housing administration, the fha. it provides insurance to banks so that they know they will get their money back. that even with the fha, tanks still might feel nervous. they might want somebody to buy those mortgages from them so in that same housing act of 1934, congress made provisions for a new breed of privately-owned firms called national mortgage associations. they were to buy fha insured loans. there was just one problem. no private investors wanted to do it. so finally, four years later, in 1938 the roosevelt administration created a federal national mortgage association, which became known as fannie mae. it was a tiny federal agency.
what private companies would not do, uncle sam would. this was not considered big news at the time. "the wall street journal" buried the story on page two and it was only eight sentences long. i want to point out, that was before he started at the journal. [laughter] otherwise we would have had a bigger story and it probably would have been would have been on page one. of course washington created many government programs in the 19 30s and many of them are still with us. but when dwight eisenhower became president in 1953, he wanted to end and some of those programs. this is roosevelt signing the act of 1834. when i send -- when eisenhower wasn't too busy playing golf he tried to do just that. he wanted to get the federal government out of the mortgage buying business. he propose legislation to gradually transformed fannie mae from an agency into a
privately-owned company. the idea was that mortgage banks, the users of fannie mae, gradually would buy shares into the company and the treasury would sell its shares. congress passed the legislation. eisenhower signed it. you can see that mimi thought it was a good idea, but there was one final -- fatal flaw in the legislation. there was no deadline for fannie to transform itself into a private company. so it did not happen. in fact four years later in the midst of the housing slump, congress ordered fannie mae to take on even more government-backed debt to finance more housing. and it was the beginning of a pattern. whenever we had a housing crisis, fannie mae was always going to be part of the solution. in essence, fannie was a subsidy to housing. the homebuilders loved it. the realtors loved it, and the rest of us weren't really paying
attention. of course any government subsidy will create inches -- constituency devoted to preserving that subsidy that fannie had a better organized group of allies than most other programs. the realtors and the homebuilders are in every community across the country. we also have a patchwork of state and local agencies and nonprofits all devoted to affordable housing. collectively these people are known as the hauser's. you at had them altogether and aired almost unbeatable coalition. so fannie mae persisted. in the 1960's, the federal government had bigger problems to deal with. the war on poverty, the war in vietnam, riots, protests. these are realtors defending their subsidy. [laughter] reforming fannie mae just was not a huge priority. and the topic came up only because of it budget dispute.
critics of president johnson complained that the federal budget did not really reflect all of the obligations of the federal government so lbj appointed a commission to try to settle this debate and in 1967, the commission decided that agencies such as fannie mae should be included in the federal budget. in the case of fannie mae that would have added something like $2.5 billion. well, we couldn't really admit that they -- we were spending all that money subsidizing home mortgages so what lbj dusted off the idea. they provided for the sale of fannie mae to private shareholders. here is johnson's signing the bill. fannie mae would still have a charter from the government and it would still have a role in public housing policy so it was still going to look and feel a
lot like a government agency. no one seems to have thought very much about whether there was a contradiction here between having a public policy role but being owned by private shareholders wanting maximum profits. officially, the government would not guarantee the debts. in fact the government would officially denied that it had any responsibility for fannie mae's debts. ..
to lbj and i asked him about the idea behind this whole setup. he basically said that it seemed like a good idea at the time. as he put it, fannie may was like a hive that attracted the money bees. it brought money to housing that otherwise would have gone somewhere else. and it didn't have to be on the budget. and that was seen as a very good thing. in came the nixon administration. surely republicans would support the idea of getting the government out of the mortgage business. well, not so fast. the nixon people didn't want to let go. they noticed the. the was a democrat. he had been a big contributor to ed monday browne, helping browne to defeat nixon to become governor of california in 1962. nixon remembered that. [laughter] so one of the early dirty tricks
of the nixon white house was finding a way to get rid of ray. nixon's housing secretary was a fellow named george romney. who's son mitt has been in the news lately. mitt's day complained that ray was not being very cooperative. he seemed to think he could run it any way saw he fit. there was talk that ray may have used fannie mae postage or letter head to raise money for the democratic candidates. and the white house was gets complaints from the republican lawyers in south carolina that democratic lawyers were getting all fannie mae work related to foreclosures. all the fees. within nine months nixon fired him as fannie mae without giving any public explanation. he resisted. he full min nate to the press that nixon was turning fannie
mae in to a patronage put pudding. he tried to get a restraining order from the federal judge. the judge wouldn't budge. ray kept showing up for work anyway. at one point, the lights went out and the phone lines went dead. some people interpreted this as a subtle message from the nixon white house. [laughter] finally he gave up and walked away. nixon appointed a new president of fannie mae oakly hunter. he was one of the cronies from california, a former fbi agent, served in congress in the early '50s. after the adventures in fbi in washington he settled down as a real estate lawyer in fresno, california. it was really pretty dull. he was itching to get back to washington back to the action so just after nixon was elected,
hunter sent a letter to rose marry woods, nixon's secretary. i guess you would say my special fielding is housing and urban development. there are few republicans in the field and fewer i would care to be with in a lifeboat. what i like at the ending, stay healthy, you are photographing well. [laughter] he was always a lady's man. he loved to party. he was a party favor of fannie mae party in thatter era. hunter bought a new headquarter for fannie mae. some people at the time said it was the sort of palace that lou we the xiv would have built if he had the money. now, during fox son's first year in office, the fed was fighting inflation. interest rates went up, and housing came down 40%. nixon in january of 1970
declared there was a crisis situation in-housing. part of the solution by nixon and congress was more fannie mae. we got the emergency home finance act of 1980. it created a second government chartered mortgage companies freddie designed to cater more to the sideline industry. it allowed them to buy a wider variety of mortgages. not just the foh loans. not just a tiny sliver. but mainstream mortgages for the middle class and the upper middle class. fannie had a larger local in the housing market and spreading across the market. why did it happen? there was no debate, really in public. the home builders for it. the american bankers association was for it. senator john sparkman of alabama was for it. so was representative pathman of
texas. george romney endorsed the idea, the rest of us weren't really paying attention. along came the carter administration. carter's housing -- was patricia roberts harris. he thought fannie was doing too much for the suburbs and not nearly enough for the inner city. okayly hunter politely reminded her it was no longer a government age. it was supposed to be imagining the own affairs. she threatened legislations to try to restore more government control over fannie mae. hunter always a lady's man tried sending flours to -- flowers to mrs. harris and even a box of fannie mae chock lits. she sent them back. she said if she ate the chocolates she would become as fat as the profit at fannie mae. well, finally the two sides came to a comprise.
the hud would set goals for the finances of mortgage for poor people if the business fell below a certain level. well hunter's people figured they had snookered mrs. harris. they were prompting to do only if whey that would have done anyway. but a precedent had been set. the government could impose quota on fannie mae. now it was ronald reagan's turn. it was morning in america, peter was a young guy in the treasury. surely president reagan would finish the job of getting the government completely out of this mortgage business. there was even the perfect pretect. fannie mae was losing money about that time. about a million dollars a day because of the double digit interest rates by the fed to fight inflation. the white house might have used that crisis as a pretext to put fannie mae to sleep. it wasn't seen as the right time.
the economy was wobbling, nobody wanted to upset the housing market. instead of putting fan my to sleep, the reagan administration and congress gave it a tax break and helped it survive. by the mid 1980s fannie mae was making boat loads of money again. it was profitable it was almost embarrassing. by now the ceo was a savvy fellow named david maxwell from philadelphia. he knew there was a fundamental choice to be made. the right-wing would always push to abolish fannie mae because it was a form of socialism. the left-wing would always be pressuring fannie and fred i freddie to earn the keep by doing more for the poor. and the bigger fannie and freddie got, the more political pressure they would feel. so this government charter, this role in public policy were they worth the bother? should fannie mae cut the cord
with a federal government and back truly private company? maxwell order up a study of the question. and the person he hired to do the study was jim johnson. johnson came from a small town of benson, minnesota. i went there. didn't find much. [laughter] from the humble beginnings, he became a big operator in the democratic party. he worked for the presidential campaign of dean mccarthy, george mcgovern, walter monodale. in fact almost everybody he backed for the president's seat ended up losing. they didn't even come close. that didn't matter because he was a smart fellow with great contacts in washington. so johnson if the study about whether to give up the charter and the answer came back as no way. for the shareholders, the government backing was just too valuable. it meant that fannie mae could borrow money cheaply and make
huge profits and pay huge salaries to the few. while supporting the dial of a nice house for everybody. fan my made a cancel with the -- deal with the devil. it was going to keep the primplegs it was going to do what it had to do to defend in them congress. as fan fannie became more political who would be better at running it than johnson. in 1990, maxwell retired. and he took home a retirement package that equaled more than $20 million. well, even charles schumer normally a big fan was taken aback. he commented, i think maxwell did a good job. that's an obscenity. underjohnson, fan my perfected the lobbying. it went around the country financing housing projects and the district of any congress who
might prove useful. the congressman loved posing for pictures in front of the project and taking credit for bringing money to the districts. fan my may was going need a lot of friends because there was a political problem to be dealt with. and a late 1980s thousand of savings and loan constitutions had to gone bust. chargely because they made a lot of crazy loans on real estate. the depositive it of the s and -- bill for about dislr 124 billion. well at this point, hud was still regulating fannie and freddie and had admitted it didn't have the time or the expertise to keep track of them. so congress decided it was going create a new improved regulators for fannie and freddie. and jim johnson said, that's fine.
just codo it our way. he said the regular regulators should not be allowed to micromanage them that might prevent them from doing the job which was to keep the housing market healthy and make more and more americans in to homeowners. in 1992, congress created a weak regulator for fannie and freddie. one of the few dissenters was representative jim leach of iowa who noted 1992 legislation was largely written by lawyers for fan fannie mae. after the great victory, fan my nay had a huge growth spurt. it started to grow very fast in the '90s. part was the disappearance of the s and l who in a way for the competitors. one of the main allies and golfing buddies was angela, a
man with the tan. son of a butcher from the bronx, he helped create the largest mortgage lender in america. he also throfd talk about home ownership. which he found both ennobling and enriching. fannie with the help of lenders like country wide began offering more loans with low down payments, 5% or less and generally loose end restrictions so more people could buy homes. and most people it seemed like a good idea. one way do get people out of poverty it was thought to help them own their own them to build up some equity. it seemed to work out pretty well. he was able to retire in 1998 as a hero. he got a pretty nice retirement deal which was not fully disclosed a the time. the pension about $852,000 per year. but that wasn't all. he remained a consult assistant
to fannie may in case they need to tap to the wisdom. that gave him another $390,000 a year. plus two support staff members, plus a car, plus partial payment for a driver. the next ceo was franklin reigns. named in honor the president who created fannie mae. he seemed to get the american dream. he grew up poor in seattle, and he went harvard, he went oxford, he became an intern in the nixon white house. both the republicans and the democrats wanted him. in the end he chose the democrats. he became a lawyer, he became an investment banker and then he became u.s. budget directer under president clinton. people were talking about him as a treasury secretary. at fannie may he carried out with the fast growth policy of
jim johnson. the clinton measures egged him on. in july 1999, hod secretary cuomo allowanced that fannie and freddie would increase the percentage of low mortgage financing that went to low or moderate income families to 50% in 2001 from 20%. he said the new rules would provide affordable house forking 27.1 million families over the next decade. think about it. cuomo can promise to create 28.1 million homeowners without asking congress to spend a single penny. he told fannie and freddie do it. they say we would be delighted. you remember how jesus fed the 5,000? cuomo housed the 28.1 million. he also had ambitious goals for
profit. he set a goal of doubling to 6.46 per share in five years. the 6.46 was taken seriously be the team. it's a. talk from the senior vice president at fannie mae. but now each must have 6.46 parented in your -- branded in your minds. you must have a raging fire in your belly that burning away all doubts. you must live, breathe, and dream 646. fannie met that goal. as for the ceo, the security and exchange commission found it had been off on the accounting. he said he knew nothing about any accounting shenanigans. this is the cfo explaining the dubious accounting in congress.
was he to blame? well, just last month a u.s. district judge dismissed the shareholders lawsuit. the judge found no direct evidence that he knew accounting rules were being violated. but when range was fired at the end of 2004, it was huge upheavily at fannie may. a couple of thousand of consult assistants were hired to straight end out the books. the total cost including fines was more than $2 billion. there was a bigger cost. much bigger. the executives and regular regulars spent so much time worrying aabout the accounts. they didn't know -- everyone was refinancing mortgages, lending standards became incredibly lax and just about everybody thought they could make a killing on real estate even the play mate of the month from may 2005. jamie westin highser.
who informed readers of playboy she was giving up modeling to go in to what she called investment type real estate. [laughter] as one financial magazine later commented, she was moved from one set of inflated assets to another. [laughter] amid the dangerous period fannie appointed a new ceo. dan mud. son of roger mud, the tv newscaster. he was an ex-marine, decorated for a dangerous mission in lebanon. now he was stepping in to another mine field. mud saw his job as cleaning up the accounting mess. making nice with the critics of fannie may, meeting the goals for affordable housing loans which had been increased further under president bush and competing with wall street in the mortgage market. wall street was crazy about mortgage especially the riskier kinds. they were profitable. wall street was taking away more
and more of the business from fannie and freddie. mud and the colleagues were worried that fannie night become irrelevant. so what should they do? should they go and buy the same kind of crazy mortgages that wall street was buying? or should they step back from the market and wait for a new outbreak of insanity? mud and the colleagues knew that the risks were growing in the housing market. but they underestimated how much worst things could get and they were red blooded american businessmen. they were out to win the became and take home the stock options. they debated for awhile in 2005 and in the end by early 2006, they decided they if wall street thought it was a good idea to buy the high-risk sub prime mortgages. if wall street was bringing in the d.o.e. fannie should do so too. of course, they said we will do in a responsible, prudent way. fannie made the same decision. they increased buying of mortgages at the worst possible
moment. just when the housing market was starting to collapse. well, by late 2007 and 2008 they were losing lots of money. they were getting an sei. they kept calling up the secretary and saying are you blind. or not. we could hardly tell china to jump in the south china sea. they were biggest creditors. by 2008 the game was over. the treasury had to provide huge infusion of money. so far it cost about $142 billion. fannie and freddie under the thumb of the regulator. edward demarco. he promised to shrink them gradually and reduce the dependence of the housing market on them gradually. meanwhile we're still relying on fannie and freddie to provide funding for most home mortgages. f any and freddie and hoa have
accounted around 90% of the new home loanedders. congress will have to make a decision about what kind of mortgage market will we have? should we go back to trusting the free market or have some kind of government mechanism in place to ensure that home mortgages can always be affordable? i submit that the historical records of the past 70 years suggests that when it comes to housing, congress will have a hard time trusting the market. thank you. [applause] >> great comments. this brings us to -- [inaudible] who has been in the mortgage research business for a mere thirty five years. is a long standing critic in the government enterprise and the great perspective on the nateful history which bob has chronicles. thomas h tom was previously with
mortgage guarantee, asset backed capital research and wholesale access and consult sei firm. he issued early warnings precinct risk about which he was correct enof course, ignored. our second discusser is ed pinto . and improve understanding of real estate agent through through appraisal. tom, you are first. >> good evening it's a pleasure
to be with you. my thanks to alex and ed and the 'for sponsoring this forum. pleasure to see bob again after the couple of years. i have, as alex suggested. i've been a long standing critic of fannie and freddie. i adopt come from the right side of the political spectrum. i tend to be a lefty. i wasn't sure if i would get through the door without an alarm going off, but i managed to get up here. my first job out of graduate school was working for m g.i. c. one of my responsibilities was there to monitor the activities of fannie and freddie. and on a quarterly basis, i made pilgrim age to d.c. to visit the executives at fannie and freddie, whom my responsibility was to monitor their programs, their products, their people, and to i did that for 11 years. i wrote a news letter and on a
weekly basis, i included a portion on fannie and freddie because they were such a key determinacy of the activity that was going on in the mortgage market. so it gave me an opportunity having done started this in the late '70s to really watch the history and to follow the evolution of fannie and freddie. and i didn't really become concerned about any of this until after 1992, and the reason i did was really threefold. as -- i had noticed the dramatic cultural change at fannie may after 1992. the attitudes, the access to people really changed fairly dramatically, and it really raised my eye brows and those of a lot of other people. and after i left m g.i. c, i continued to monitor the programs as part of my consult
sei and the research was doing. i continued to follow all of their programs. i got progressively more concerned. it was not only the more conservative elements, but also the liberals that as well that were concerned about what was going on and i remembered distinctly for example, coming to washington in the summer of 1998 to attend a seminar that ralph neighedder was sponsoring, he too was very much a critic and so the criticism that was being leveled at fannie may was coming from, i think both sides although admitly the conservatives were more on top of it than the democrats and the liberals. the concern in addition to the cultural change that i saw, was a result of changes that were going on inside of fannie may
and freddie mac to a lesser extend. bob has done a great job of tracing this history and the evolution in the book. and for me it was something like a trip down memory lane to read his book because i kept a running in to names of people like ray, roger, les, all of the people involved in the agency and running it. i one summer i read buchanan's book, the noble -- economics science and got turned on to the concept of public choice theory and that was another alarm bell for me because it gave me another perspective to in which to look at what was going on inside of washington. i thought very much that all of this would get solved because
the problems were immense that it seemed to me that if i would notice this, and i didn't come out of harvard or oxford that certainly the rest of the people in the industry would be as concerned or more concerns than i was about this. i knew about economics to understand the difference in structure industry structures competitive markets as compared to [inaudible] and monopoly, and i knew too with you had market structures that were this this case they created a large debt weight loss. so in the spring of 1996, i was invite bid the mva, an i apologize if my voice oscillates. i got out an airport an hour and a half ago. my ears haven't yet popped. any case i was invited to make a
presentation as to the profitability of the mortgage banking industry and why it had for so many conservative years, three prior years, why the industry had faired so poorly from a profit perspective. that prompted me to do some rempleg. i was fortunate in that the summer of 1996, prior to the presentation, i had an opportunity to read the study that came out that spring wells the hud study and the treasury report. the more i read and the more alarmed i became. by the time october rolled around, i was fully prepared in order to blast the gse, if you will. the speech of which most is there. it's been passed out you. you can see where my criticisms were. that speech was not particularly well received except among the people a lot of people in the
industry who felt that absolutely. it was many thought i was right on with the analysis. fannie and freddie people however within the first ten minutes were up and out of seats and out door. wasn't to warn who was the president at the time and complained as to why they would allow someone like me to criticize them. what could i possibly know that that would prove to be correct for self years i was blackballed as a result that have. and the mba took them more like five or six years before they allowed me to make a presentation. in the interim, within weeks of the research i had been doing and selling to the industry i got cut off by fannie and freddie mac. big surprise. my partner -- partners weren't
particularly happy. in retrospect, it worked out. as time passed i became more and more concerned about what was going on. it lead me to write a series of letters to everyone or anyone that i thought who would listen who could take a second look at what was going on. one of the letters is included among the handout materials and that was a letter that sent in 2000 to allen green span. the particular timing on that letter was such that it was the first time that green span had publicly criticized fannie and freddie. i wrote a letter to him commending him on that and jot lining my concerns most of which were economically based, and asking, you know, if he would take a look a closer look at what was going on. i continued to write letters like that over a period of years. in fact all the way up to
september of 2008. one of the letters was another one, a second one that was included was a letter they wrote to the hud secretary in 2005. the summer of 2005. our research firm had completed a study of the nonprime market, and the conclusion of the study was that almost 50% of the loans that were being originated were nonprime loans. these were loans with low documentation with high ltv, with no income or asset verification, and it was preed calletted on that that i wrote to the hud secretary and asked him if he would please discontinue championing and actually cheer leading home ownership because i thought that we were very close to the edge. we were within a year or to, i
thought and as indicated in the letter of a collapse in the mortgage market. -- ?awbl. >> one minute. >> okay. having said that, let me get back to the book. i write a monthly book review. i'm looking forward doing a book review having read bob's easy to read and that will be published in the december issue of mortgage banking magazine. with that -- i turn it over to ed. >> thank you. ed? >> thank you, alec. thank you for arranging this book session, and thank you, bob, for an excellent book. i enjoyed reading and like alex, i learned a lot. the history going all the way back to the beginning. i knew some of it but learned more and thank you, tom, for all of your help and standing up to fannie and freddie and your friendship.
my test when i read a book, i have some relatively intimate knowledge of is look at the parts that i have the knowledge and see how if compared to what i know. there's a book that was written by jim colins about ten companies. one of which was fannie may. it was talking about fannie may in the 1980s the david maxwell era. i was there there from '84 to '89. not taking anything from what david did during the time period, if you were take out any references to fannie may if you didn't know it was about fannie may and ask me what company is that chapter about, the last company in the world that i would have guessed was fannie may. it just had no relationship to reality. there's another book "all the devils are here" the first chapter is largely about the 1980s and i found twenty or
twenty five mistakes large or small in the first twenty five pages. i had to wonder what's going on in the rest of the book that don't have as inte sp intimate knowledge about. i can say that in reading bob's book, i found no major mistakes. i might have found date where i scrolled qinled. where he information i was unaware of. it seemed scintd and tied up. bob, congratulations on the research work. i found that his research had a broad range of people he talked about to. it was one of the problem, they had a narrow rake of people 0 so they got a one-sided view. so your reporting insingts and the integrity and thought of your reporting comes through to me as i read the book. the bob talked about jim johnson
and that study that was done so the conclusion was if we don't give up the charter. we have to hug the charter and protect the charter at all cost. jim was the one that scam up with the strategy that said the way to do that is affordable houses. because the only way regulators. the real regulator was congress. the only ones who could change the charter. if you could basically cooperate congress and capture them through affordable housing you would protect your charter and you could do all the things that from his perspective that went on to do. why johnson? a friend of mine who had been at fannie in one of the regional offices for long time said it was simple. fannie many a near-death experience on interest rate risks. they thought they so much of solved through hedging. they had a near-death experience in -- they thought they had
fixed that. they were left with one risk. political. who do you bring in to deal with political risk? you bring in a politician. you described well. the qualifications that jim johnson had. i want to spend the rest of the time i have focusing on a couple of threads. one was the press release that fannie may and jim johnson announced in 1994, the trillion dollar commitment, a couple of thousand word i they went in to great deal about what they were going to do and the national 0 home ownership strategy both of which are discussed in bob's book. i start with lenders ab statement by a community activist the testimony for the senate. i think it represents the point at which the challenge was thrown down that brought fannie may toct with community activists and congress to accomplish this would became
trillions and trillions of dollars and the loosening of the underwriting standards. lenders will sphontd most conservative standards unless they are aggressive in convincing in the effort to expand the historically narrow underwriting. i first focus on fannie and freddie and circle back to lenders. i would point out lenders were conservative and that had to be changed in the way to do it through fannie and freddie. step one, 1994, you had a handout, i'm going go through, it's a quick thing. fannie vowed to transform their words housing finance. in 2,000 word press release a commitment to transforming the howxing system they will provide $1 trillion in targeted lending. through the before the 28 million commitment this is now 10 million back in 1994, the families with income out of a
low or med yam income. reach out to every renter in america to provide the information they need to buy a home. break down barriers. every american wants to gate mortgage will have the loan approved or put on the path to get the loan approved. target the fastest growing. the -- a eliminate l final no in mortgage application process. they had in the press release in 1994. they promised clear and flexible underwriting standards. it is another word for loose lending. that's what they mean. affordable housing is another word for cross subsidizes. that what it means. they were famous for that and well documented by the fhfa. the one that really was probably
the worst that really political sized fannie is bob talked about open 25 fannie mae grew to 50 something. that was a huge cultural change and not existed before that. i can testify to that during the time i was there. notwithstanding the rhetoric and the goals. this trillion dollar down payment on transforming housing finance by showing america new way home, the book that jim johnson wrote was really an effort to do a more straightforward and mundane objective. stop in the unwelcome changes to the charter, by capturing the regular regulators congress and give copy use amount to
affordable housing. it worked until the charter was changed on june 30th 2008 a mere weeks before the collapse. at the same time step two with the national home ownership strategy that brought in the rest of the lenders that were conservative. it brought everybody in the whole mortgage finance needle to the fold and created a partnership to accomplish financing, more affordable and flexible in order to increase home ownership opportunity. what happened you have the charts fannie went to the competition with fha. down payment went up. take issue with what bob said -- [inaudible] down payment went down. it was the process that was slow gain speed but it went on for many years starting the early 1992, about '93 and '94. this chart inverted. it it's showing the decline and downtown payment on sub prime as
sub prime had to try to compete with fannie and freddie were doing. it had to reduce the down payment. 25% down payment on purchase loans. the chart starts in 2001. tom had data that showed in 1992 it was a 25% down payment. >> one minute. >> okay. you had debt ratios, kept going up and up and up. i point out that this was again, a process that took place every year. by 2007 over one-third of the tbrks se fully documented loans exceeded a 45 total debt ratio. tom provided data that said it was a b sub prime loan back in 1991. that's how prime changed over time due to the efforts. all day sort i would add it happened relatively early and fannie mae and freddie mac were large players. the consequences of the
misrepresentation on lending well known, lier loans, same thing happened with credit scores. so back to the quote lenders will respond to the most conservative standards unless fannie and freddie convincing. -- and that's what we ended up with. thank you. >> thank you very much. and we're going to leave a little extra time. i know, of you want to ask questions. but let me give bob a chance if you have any comments to add at the point far minute or two. >> no, thank you very much. i think we should turn over the time to people who came here today. okay we'll be glad to take your questions. i remind you of 'i rules. wait for the microphone. you can give it to the young fellow here. >> -- [inaudible]
only if he behaves himself. and tell us your name and affiliation and your question. >> [inaudible] long time fan of fannie and freddie, or not. bob, i thought u heard you said at the end of the year, the remarks there was an infrance congress might be as it approached fannie and freddie it might have in mind 70 years of market failure. i was puzzled by that comment. it seems to me we have 70 years of government failure a failure of government policy and my question for you is given 70 years of government failure in how all aspects of housing finance going forward why should congress trust the government? >> thank you for giving me a chance to clarify that. my point is that actually
i have a question related to dan mud's testimony where he talks about serious debate that cored around 2005 in fannie why by he mentions whether to stay the course and stay as a remain as a niche player on the mortgage market, or to enter the sub prime market as a means to capture additional market share and stay competitive with what was occurring at that time. my question is if nanny and mud would have stayed the course and not gone so heavily in to the sub prime market. what would have happened and where would they be today? i know it's a hien sight question. i'm interest on your thoughts would be today given that. >> thank you that's an excellent question. i think they would have lasted certainly longer than they i did. it's hard to know whether if they had stayed the course at that point they could have
survived 2007 or 2008. they might have. we did have a 230% fall in-housing prices which was devastating for anybody holding trillions of dollars in mortgages. on the oh hand, the decision to not stay the course and take more risk starting in the beginning of '06 worse end the situation for the whole country and themselves. dan mud would argue no matter we couldn't have survived 2008. i think we'll never really know that. but we do know that what they did made things worse. >> you have a depend? >> yes. my view it was building over a long period of time and really started if you looked at nominal house increase prices they started nationally in 1994. if you look at real house prices
they started in 1997 or 1998. reached levels that had never even been approach inspected the country's history. so you had going on a long period of time. a normal bubble boom bubble lass the boom part might last three or four years, five years tops. usually my experience is every case i've been involved in from the 1970s on ward mid '70s on ward you end up with the last couple of years leading to some crazy lending. that's the way lenders work. you move out the risker. we a technical term going down the slippery slope. that's what would happen. what you had here was a process that wept on for just take the real house price exchange from 1998 full year through 2006, 2007 depending on which index you look at. you had nine or ten years of
unprecedented growth. the last couple of years was the fraud. you an immense amount of the bubble that was immense size before that. they were fundamentally undercap losed. that was one of the big risk. at the same time they had the capital a weak capital. they counted a lot of tax credit and losses a things. they were doom nod matter what. they were floating on a very thin layer of capital and that had been the case. they negotiated that case in 1992. >> thank you. >> there was one more other big lender really big lender to american real estate and that was the chinese and other foreign official bodies who were buying fannie and freddie obligations. which one going feed the bubble. they were buying it rightly assuming that the government would take care of them even though they had largely
participated in running up the risk. the risk would fall on somebody else and henry paulson interesting on the crisis relates how went to the chinese for the olympics and told the finance minister, i told you i would take care of you. [laughter] any ore questions? >> the one in the back here and we'll come to you in the front. >> dpaifd, the national association of federal credit unions. i'm curious woo who you feel should be secure mortgaging and if you feel it's the banks why should we trust them after what just happened. >> i would like to hear from you on that one, thanks. >> you want to start on ha? >> robert, were you trying to direct that to somebody in particular? >> all three. >> okay. everybody. we'll, bob we'll give you fist and keep the other comments brief, however. >> i would say it doesn't matter so much who does the
securization. i think be in favor of trying a rule where loan going to a securization have to committee common sense standards. other loans that don't meet the standards would be made but they to ceptd by the lender. it could be a public utility or or it could be opened up to any name want god to the business. i think there's going to be huge debate over what structure makes sense. i think it's going to be difficult for congress to decide what is the right formula. >> [inaudible conversations] >> i think i concur with bob. main wants to securetize the issue should be permitted to do so. why not have a structure not -- [inaudible] in term of the tie to the government but where any originator can issue securities. i think that the distribution that the demarco is going, the
fhfa with creating the securization platform, if you will, that anyone can plug no n to is a good thing. and will move us in the right direction. open up security to large originatessers that puts to the -- put the pools thooght would not preclude credit union national or aba or like bodies to create for smaller entities that don't have large amounts of volume. >> or even a federal home loan bank. >> absolutely. >> the white paper that alex and peter wallace and i wrote about a year and a half ago, we address the question twofold. one was should have a mortgage market that does not rely on government primarily and the way you get there is by having expectations and design that vast majority of the loans loans are prime loans and prime loans as common sense prime loans came
to be defined by fannie and freddie. secondly we suggested that mortgage backed security should be limited to prime loans as was mentioned if you want do something else, do you that through portfolio through the capital requirements and other are very difficult. i would point out there's a great study it's on my scholar page of the new york governor appointed a commission to investigate the collapse mortgage back security market and there was a commission appointed and they gave their report and they detailed the problems with the mortgage backed security. the only problem is the data report 1934. it's the -- [inaudible] report. you find it on my web page. [laughter] >> thank you. >> a question up here, please. we bring the microphone on this side here. thank you. >> hi, i was going add a comment. . >> tell us your name. >> carol. i was with the other gse from 1990 to 1995.
i was directer of policy and became director of regulatory compliance when [inaudible] was formed. i have to say, the stress test were dictated. they wouldn't have caught some of this. they didn't allow for the prefall in the way the assumption was created. i worked on working with hud i'm with the -- how they were going to be implemented. there was concern because people were thinking where are we going find all these people qualified for the mortgages? and we're underwriting efforts to make the guidelines more friendly toward nationalities that might have a different way of dealing with home buying like where you have extended family type of support gift and things like that. but there was concern because it is a public and a private company with market share and country wide was coming in with securization but at that point, my perception was that fraud was
really you had criminal, it wasn't until housing really became seen as an investment good that everyone got on the bandwagon and the mortgage bankers came in. so -- that was my perception. what we did -- we did the exotic product of that time were tiered payment mortgages. home equity loans were just coming on board. the most, you know, most of the exotic things were certain type of arms. and the loans were monitored but i think you had a different type of borrow her. -- [inaudible] >> thank you for the comment. take two more questions and then we'll go to the -- and for the last question i'll come over here. okay. >> hi. i'm jim -- [inaudible] well known toed todd and ed
housing special specialist at gao. i'm going ask the usual provocative questions. actually to mr. hagty too. i have read your book, i've not seen anyone including . >> you can fix that immediately after the program. >> i actually plan to buy it. i long a history of myself gaiting back to fannie and freddie well before i ever came to gao. my question basically this, i don't know whether you have done in the book i haven't seen it or i haven't seen anything along the lines either on this or the matter didn't seem to be doing what i suggest which is something that gao would do. if we were asked whether or not the federal government was responsible, the first thing i know i would suggest to my colleagues is okay, let's do a side by side comparison. you have the private -- you have the portfolio lenders. you know what the performance
is. preferably by -- origination year. go back whatever you want in' eu789 when it began and go all the way up to 2006 and even beyond 2007 if you want. 2008 and do a side by side comparison. that comparison has got include not just loan default. default percentages. i've seen that in ab article to you. that's not adequate. you have to translate to loan volume based on unpaid principal balance. that's the key. it doesn't matter if fannie had a 7% fault rate. if in fact fannie's volume is six times higher. right. or vice versa. so i've never seen that done. i don't know if you have done it. i didn't see -- [inaudible] i don't know if anyone has done it. until someone does that side by side thing particularly looking at the immediate years before the bubble burst in 2006 and
after that in 2006 and 2007, i don't see how you can make a conclusion that either the private sector did it or the federal government did it. >> good technical question. any comments? >> my -- both of them did it. but it would be valid to look at it in that way. i can't remember if i have seen it that kind of volume-related comparison. i think it would be viable to look at. yeah? >> jim, i think the issue that -- yeah issue that really changes the question is fannie and freddie own the prime market. if you are going -- and the affordable housing goal, they own the prime market. the traditional prime market. nobody can compete with them. that became the basis as the core business. as they had to move out and risk they didn't move to tighter prime. they moved to looser prime.
as hod pointed out in 2000, whatever fannie and freddie bought was conceded to be prime. the market knew it as prime. you saw the chart. that's why i put the charts up. as you moved out in debt ratio what would have been a sub prime loan, let's take debt ratio if 33 percent would have been a b sub prime. there was a minus, b, c. b sub prime those are called prime loans. where's the rest of the market going? you have 20% sub prime in 1992. half was fha and half private sector. you had 20% in 2002. they had a choice. they could either bhoond the field or move out the risk curve. as they moved out the risk curve. they had a choice. they moved it out. i showed what fha did. the private sector moved out also. to say that fannie ended up with the best and the other ended up with the worse is saying an
obvious. of course they did. not only the prime but they got the best and the worse. leave it at that. >> the last question over here. the mirk phone there. okay. thank you. >> john henry. dry stone capital. do any anyone have a detailed plan on how to put fannie mae and freddie mac in to runoff? how do you take a $5 trillion enterprise and put if in discontinued operation over a time period that, you know, would be politically acceptable in ferm -- terms of disruption? >> bob, let's tart on that. after ward, if you want to catch me, we talk about that. i'll share a few ideas with you. >> i certainly don't have a plan. i think that alex and ed have suggestions and very interesting ones.